The following rules are an abbreviated version of the video called Do’s & Don’ts from the “The EZBreakout Method Master Blueprint Video Course”. It is imperative that you follow these rules to protect your capital. I have done the trial and error for you with my own personal money, so you don’t have to suffer through the pain of figuring these rules out for yourself. These rules are in no specific order and each of them are important:
1. BEWARE THE FIRST 15 TO 20 MINUTES OF TRADING:
In the opening minutes of trading, the market can be chaotic to say the least. Breakout alerts that go off in the first 5 or 10 minutes can be misleading. Some might be real and some might be false signals. The key is to check out the VOLUME. However, in the first few minutes you might not be able to judge VOLUME. If only a few thousand shares have traded, leave it alone. Another thing that can happen, if you are trying to follow too many stocks, is that a dozen alerts can go off at the same time. The remedy for this is that you reduce your lists to the lowest number of potential breakout candidates. Focus on the very, very best charts.
2. BEWARE OF GAP UP OPENINGS IN THE STOCK MARKET:
We have all seen those days when a big piece of news comes out before the opening bell and the DJIA vaults 100 points at the open. Beware of these days! You will have false signals galore. The only thing you can do is wait for the first 30 minutes to an hour and then figure out which stocks are truly breaking out. The only way to tell is VOLUME, which leads to the next point.
3. NEVER CHASE A BIG GAP OPENING IN ONE OF YOUR BREAKOUT STOCKS:
If one of your breakout stocks gaps up big at the open, don’t chase it. Let it do one or both of these things:
- A) Let it pull back to the 9 EMA on the 5 Minute Chart before you buy (Study The EZBreakout Method Video Course for more on this). This way you can put in a very tight stop and manage your risk accordingly. If the stock is good, it will try to tag the line (sometimes it doesn’t quite touch) and take off again. Sometimes, the stock just won’t pull back to the line in the first few minutes after breaking out. In this case, leave it alone for now and see how it shapes up on the 5 Minute and 60 Minute Charts. Then you will be able to spot the next good entry point.
- B) Wait for a High Handle (Study The EZBreakout Method Video Course for more on this) to form on the 5 Minute Chart. Many strong stocks will run up and then pause for several bars forming a nice tradable High Handle on the 5 Minute Chart. And in the meantime, this gives a chance for the 9 EMA to catch up so when it breaks out again from the high handle you have a low-risk trade.
4. KNOW WHEN ECONOMIC REPORTS ARE COMING OUT:
One way to ruin a good day is to be unaware of when Economic News Releases happen. Economic news has a way of making the market flop around. It can also change the direction of the market in an instant. 9:45 AM and 10 AM Eastern Time numbers can be especially tricky. One place to find the Economic Calendar is: http://biz.yahoo.com/c/e.html
It’s best to keep your positions smaller and stops tighter around these numbers or, even better, just liquidate right before. You can always buy your stocks back.
5. BEWARE OF “FED DAY”:
The day that the Federal Reserve Open Market Committee announces their current policy decisions (aka “Fed Day”) is a very tough day to trade. I HIGHLY RECOMMEND that you cease trading and flatten any positions before the policy statement is announced. The gyrations after the announcement are absolutely impossible to trade. You can get burned very quickly. An additional day to be aware of is the day the “Fed Minutes” are announced. The Fed Minutes can make the market act like a mini Fed Day.
6. NEVER BUY A STOCK THAT IS BELOW THE 9 EMA ON THE 5 MINUTE CHART:
I can almost guarantee you that if you are buying a stock that is more than .05 or .10 below the 9 EMA, you will lose money on the trade. A stock below the 9 EMA (for more than a few seconds) is NOT IN PLAY. Whatever you think you see on the chart is a hallucination. Also, never short a stock above the 9 EMA on the 5 Minute.
7. KNOW EXACTLY WHEN THE NEXT EARNINGS RELEASES ARE FOR THE STOCKS YOU ARE FOLLOWING:
It is of utmost importance that you know when your stock is releasing earnings.
NEVER HOLD A STOCK WHEN THEY RELEASE EARNINGS. We have all heard about the stock that opened 5 or 10 points higher on earnings, but let me tell you, that is the exception. Seven times out of 10, a stock will go down on the day they release earnings; NO MATTER HOW GOOD THE NUMBERS ARE! This is not an opinion, this is a fact. It just isn’t worth the risk. For some reason, it took me several years to figure this one out. If you hold a stock overnight for the earnings release, you are GAMBLING. Trading is not gambling (no matter what your friends and family tell you).
BE CAREFUL OF TRADING STOCKS THAT JUST RELEASED EARNINGS AFTER THE MARKET CLOSED (THE NIGHT BEFORE) OR BEFORE THE MARKET OPENED: Many, many times I have seen a stock gap higher at the open on earnings, only to close DOWN substantially on the day. An opening like that can trigger an alert and cause you to make some very poor trades. There may indeed be a good trade there, but if the stock breaks the 9 EMA on 5 Minute and stays there, let it go and forget about it.
8. ALWAYS HAVE A STOP LOSS ORDER FOR EVERY SINGLE TRADE:
This is another one of those things I can’t overemphasize. Here is a short list of reasons why:
Not every trade works: During a bull market, 7 or 8 out of 10 properly interpreted charts will work. Some won’t! Get out right away when you are wrong!
Unexpected News: Weird market moving news events can happen during market hours. Headlines like “S & P downgrades Greece” or “Building Explodes in Manhattan” can have a sharp, sudden effect on the markets until participants find out what really happened. Also, news can come out on the industry you are trading or the individual stock itself. You don’t want to get stuck in a position during these events.
- A Power Outage
- An Internet Outage
9. NEVER BUY DIPS:
A lot of traders like to buy stocks on dips. I personally have not had a good winning percentage buying dips. My percentage chance of having a winning trade is much higher on breakouts. This rule includes:
Never buying a stock below the 9 EMA on the 5 Minute Chart
Never ever consider a stock trading below the 50 day moving average on a Daily Chart.
10. NEVER TRADE THE NEWS:
As I have already pointed out, the news can be misleading. Stocks usually don’t do what you expect them to do on news. How many times have you seen a stock beat earnings expectations and raise guidance, only to get hammered as soon as it reopens? Or, you have seen a piece of news that you knew would hit a stock, but the stock went higher? After 20+ years in the business, I still am shocked by what stocks do on news.
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